Earnings Call: Q4 2019

Mar 24, 2020

Earnings release

Good morning, ladies and gentlemen, and welcome to the Automotive Properties REIT 2019 4th Quarter Financial Results Conference Call and Webcast. At this time, all lines are in a listen only mode. Following management's remarks, we will conduct a question and answer session. Please be aware that certain information discussed today may be forward looking in nature. Such forward looking information reflects The REIT's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward looking information. For more information on the risks, uncertainties and assumptions relating to forward looking information, please refer to the REIT's MD and A and Annual Information Form, which are available on SEDAR. Management may also refer to certain non IFRS financial measures. Although The REIT believes these measures the This call is being recorded on Tuesday, March 24, 2020. I would now like to turn the conference over to Milton Lam. Please go ahead, Mr. Lam. Thank you, Joanna. Good morning, everyone, and thank you for joining us today. With me on the call is Andrew Kalera, our Chief Financial Officer. We entered March 2020 with strong momentum, well positioned to continue advancing our acquisition program and the situation has quickly changed for us and the market. Due to the economic uncertainty caused by COVID-nineteen, in today's call, we will address both the initial effects of this public health crisis our business and our Q4 financial results. We made strong progress in expanding our portfolio our property portfolio through acquisitions in 2019 with the addition of 7 dealership properties. Through these acquisitions, we further diversified our tenant base and geographic presence within attractive metropolitan markets across Canada. To support our growth, we completed 2 public equity offerings in 2019, raising an aggregate gross proceeds of approximately $176,000,000 Our expanding property portfolio and triple net leases with contractual rent increases continue to drive significant growth in each of our key performance metrics. In comparison to 2018, our 2019 property rental revenue grew 40.1%. Cash NOI increased by 42.3 percent. AFFO was up 36.3 percent and AFFO per unit increased to $0.98 up from $0.87 a year ago. This growth in AFFO per unit was achieved even as we issued approximately 7,900,000 units in the 3rd week of December through a $92,000,000 equity offering to support our acquisition strategy and also reflects a one time cost of approximately $1,000,000 related to the internalization of REIT's management and operations. This internalization was an important milestone for us, signifying the next step in our ongoing development growth and further aligns the REIT with its unitholders. Our strategic alliance agreement with Dilawri has remained intact demonstrating Dilare's continued support for APR. Subsequent to 2019, in early February, we completed 2 more dealership property acquisitions for an aggregate purchase price of $28,900,000 consisting of Regina BMW and the North Shore Acura property in Vancouver, both of which were Dilawri properties. While our momentum has now been stalled due to the COVID-nineteen, it's important to recognize the significant progress that has made in capitalizing on every on a very compelling industry opportunity and the strong underlying value that has been created for our unitholders. This period of uncertainty will pass and we are confident that the market will again recognize the strength of our portfolio, market position and the importance of our tenants business to everyday life in Canada and the significant opportunity that we have for further value creation ahead. Our December equity raise provided us with a strong liquidity position to manage through this. I'd now like to turn it over to Andrew Kalarick to review our financial results for our Q4 and financial position. Andrew? Thanks, Milton, and good morning, everyone. We have a strong liquidity position with $75,000,000 in undrawn credit facilities, dollars 13,000,000 in cash on hand and more than $100,000,000 in unencumbered properties. Property rental revenue in the quarter was 18,100,000 an increase of 31.9 percent from Q4 last year, reflecting growth from properties acquired during and subsequent to Q4 last year and contractual annual rent increases across a significant portion of our portfolio, total and same property cash NOI for the quarter increased to $15,100,000 $10,400,000 respectively, reflecting increases of 32.4 percent and 1.2% compared to Q4 a year ago. Growth in cash NOI was primarily attributable to acquisitions. Growth in same property cash NOI primarily reflects contractual rent increases. G and A expenses for the quarter were approximately 13.1% of our cash NOI compared to 9.8% in Q4 last year. The increase primarily reflects deferred unit expenses, which are subject to vesting and selling restrictions associated with the internalization of management and operations of the lease. We expect G and A expenses as a result of the internalization to increase by approximately $500,000 including incentive plans for the 2020 fiscal year. Net income for the quarter was $3,900,000 compared to $13,700,000 in Q4 last year. The negative variance was primarily attributable to the change in fair value adjustments for Class B LP units as well as higher interest expense and other charges, partially offset by growth in NOI and fair value adjustments on investment properties. FFO for the quarter totaled $10,000,000 or $0.222 per unit diluted compared to $7,300,000 or 0 point 2 3.4 dollars per unit in Q4 last year. AFFO totaled $8,200,000 or 0.202 dollars per unit diluted compared to $0.065 or $0.21 per unit in Q4 last year. The increases in FFO and AFFO in Q4 2019 were primarily attributable to the impact of the properties acquired during and subsequent to 2018 and contractual rent increases. The declines in FFO and AFFO unit in Q4 2019 were primarily attributable to the one time internalization cost and to the timing difference between the closing of the $92,000,000 equity offering in December 2019 and the deployment of proceeds from the offering. Costs of approximately $1,000,000 associated with the internalization lowered our AFFO payout AFFO per unit by approximately $0.02 for 2019 would have lowered our AFFO per unit by $0.02 for Q4 2019. 19. A portion of the proceeds of the December offering was used to fund the purchase price for the acquisitions of straight line Kia, which closed in December 20 19 and the Regina BMW Acura North Vancouver properties, which closed February 2020. For Q4 2019, the REIT paid total distributions of $8,000,000 representing an AFFO payout ratio of 99.6 percent. For 2019, the REIT's total distribution of $28,700,000 to unitholders represented an AFFO payout ratio of 88 0.6%. Excluding one time costs of approximately $1,000,000 associated with the aforementioned internalization, our AFFO payout ratio for 2019 would have been approximately 86.1%. The higher AFFO payout ratio for the quarter relative to Q4 a year ago was due to internalization and timing differences between our equity offering in December and the deployment of proceeds mentioned earlier. For Q4, twenty nineteen, the fair value adjustments in investment properties was $1,300,000 The fair value gain adjustment was primarily due to NOI increases, partially offset the transaction costs related to the straight line acquisition and adjustments on ROU assets to 2 of our land leases. The REIT's evaluation inputs are supported by quarterly market reports from an independent appraiser, which indicate no change in capitalization rates for the REIT's markets since year end 2018, the overall capitalization rate applicable to the entire portfolio remained at 6.6%. I'll conclude with our liquidity and capital resources. The REIT's liquidity position as at December 31, 2019 included approximately 75 dollars 1,000,000 of undrawn revolving credit facilities and $45,300,000 in cash. Currently, undrawn credit facilities remain at $75,000,000 and we have cash on hand of approximately $13,000,000 Further, we have 8 properties valued at over $100,000,000 that remain unencumbered providing us financial flexibility. And we will continue to closely monitor our liquidity and capital resources. Capital requirements in the next 2 years are low and capital expenditures remain are expected to be insignificant. We had $398,000,000 outstanding in our credit facilities at year end with an effective weighted average interest rate on debt of 3.77%. We have a well balanced level of annual maturities with interest rate swap terms ranging between 3 8.8 years and our weighted average interest rate swap term is 6 years, up from 5.6 years at year end 2018. The REIT's debt to GBV is at 43.6%, providing us with strong liquidity. I'll turn the call back to Milton for closing remarks. Great. Thanks, Andrew. While new vehicle sales in Canada were down slightly in 2019 compared to 2018, the overall business was very healthy. The period between 2016 2019 represented the 4 highest years on record for new vehicle sales in Canada. 2020 was off to a positive start until COVID-nineteen. We've been closely monitoring the pandemic and the potential impact for our business and our tenant businesses. COVID-nineteen is likely to have a significant near term adverse impact on new vehicle sales in Canada with the supply chain of new vehicles and parts can also be temporarily significantly disrupted. This will impact our tenant dealerships businesses in the near term as consumers delay purchasing decisions. It is important to remember that automobiles are an essential part of our daily lives and delays in vehicle service or purchases should provide a should the risk levels rise and we'll continue to monitor and adjust our business continuity and other plans as this crisis evolves. We currently have a strong liquidity position and benefit from a long term triple net lease structure and 100% occupancy rate with some of Canada's largest automotive dealership groups. Our properties are located in attractive commercial corridors the Canadian urban markets, mostly back down. We're confident with this intrinsic value of our portfolio and our opportunity for long term value creation. That concludes our remarks. We'd now like to open the lines for questions. Joanna, please go ahead. Thank you. Ladies and gentlemen, we will now take questions from financial institutions and analysts. And your first question comes from Brad Sturges at IA Securities. Please go ahead. Hi, good morning. Good day, Brad. I guess maybe just starting off with the non Dallari tenants, could you comment on, I guess, the EBITDAR coverage ratios that or at least the range of coverage ratios that would be exhibited at December 31? Sure. While D'Aulary provides metrics and certainly AutoCanada provides metrics as being a public company. The remaining private tenants, we receive their financials as we do the acquisition and we're very comfortable with them, but we do not receive annuals. So we can't comment on rent coverage and EBITDAR. Certainly, our strategy from day to allow us greater security. And at times like this, we're happy we did that. And maybe just digging into dealership profitability a little bit, with new car sales slowing down in the near term and probably beyond that. How much of profitability within the dealership could be from like repairs and maintenance, finance, insurance, things like those revenue items? Sure. I mean typically, if you look at the U. S. Companies and what we've seen here, you're normally talking about a significant portion of the revenue is new car sales, but 80% of the profitability is from the other sectors you just mentioned. I would caution that this is not just an economic drop in new car sales. There has been consumer behavior changes as well. People are in shutdown. So we expect to see it's still early days, but we would not be surprised to see a drop in service as well. I think one of the comments that we look at and kind of step back and consider is where does the automotive dealership, the automotive world sit when we come out of this. As mentioned, I think that will allow some pent up demand. You can delay your service, but at certain point when kind of the world gets back to normal, you're going to get rush back in to get that. You can delay switching out your winter tires. But at a certain point you're going to want to do that. You can delay a new car or used car, but at certain point it comes back. So we're very confident that this is a very strong business going forward. But any of the metrics we would normally look at for dealership profitability under COVID-nineteen, there's just not the transparency in the track record to make any assurances. And with in the context of your liquidity position and some of the planned capital improvements that you're looking to do over the next few quarters. Does this impact your expected timing of those improvements? Or are those still going to go on as expected in terms of current timing? What you've seen and certainly when you see the Q1s, there was a number of capital expenditures that are related to actually most of them are related to tenant obligations that we have upon acquisitions and a number of those have already set. Andrew, what's outstanding? Yes. Brad, this is about the next 12 months, about $5,000,000 and that will be tenant dependent. If the tenants spend the money on their upgrade improvement, then we'll fund that. At this point in time, it is probably likely to happen, probably in the back half of the year. So it's about $5,000,000 And over a 2 year period it can be about it's about $15,000,000 And that is associated with the rent increase as it's funded. Right. And just strategically, are you is the focus now just preserving liquidity and keeping levers lower? Or are you would you consider acquisitions opportunistically or to help strengthen one of your tenants, for example? Yes. I mean, that's kind of 2 questions in 1. I think It'll be really interesting. We think this may allow for an elevated level of consolidation when we come out of this. So we certainly want to be there for that. And I would think that the opportunities on the consolidation may occur before the capital markets fully come back. But that is more of a mid term as opposed to a short term. I think in the short term, you have to keep your head down and see what is occurring around you. You do make a point about supporting your tenants. There may be the opportunity in working with a tenant. We always say we want to be partners with our tenants to provide them liquidity and allow us to get a high quality property. So I won't say no to that, but it certainly has to have other benefits for the REITs and unitholders as we look at it. Okay, great. I'll ring back. Thanks a lot. Thank you. The next question comes from Jonathan Kelcher at TD Securities. Please go ahead. Thanks. Good morning. Good morning. First, just following up on a couple of Brad's questions there. On, so you don't get the annuals for the non Dilawri tenants, but when you were doing the acquisitions, what sort of the range of rent coverage that you're comfortable with going in? Yes. They tend to be very much in the general market, which is the 2.5% to 3%, 3.5%. And that tends to be consistent amongst a lot of the larger dealership groups. They tend to be pretty good at what they do. Okay, fair enough. And then secondly, just to confirm on the capital improvements, the tenant spends the money and then you repay them? Correct. Yes. It's associated with money spent for construction for either expansion well, mostly for expansions or construction. Okay. And then just finally, have any of your tenants come to you yet for any rent deferrals? And how are you going to think about that if and when that happens? Yes. Certainly, looking around the industry being retail overall, you're certainly seeing that theme come up in my view way too often. But I understand COVID is a very different world than non essential services. And it was good to see that dealerships in Ontario and service in Quebec are included in that essential bucket list. But we do understand that there is going to be an impact in consumer confidence and consumer spending. Deferrals, we'd have to take it and we would like to see more information before we have commitment. It's just too early to do assurances. We certainly want to work with our tenants though. Okay. Thanks. I'll turn it back. We firmly believe these are the the reason why we went with these tenants to begin with is we believe that they will be some of the groups that have the banking support, the financial support, the OEM support that in the mid to long term, they will be the consolidators. So we want to be there with them as they continue to grow. Okay. Thanks. Thank you. The next question comes from Kyle Stanley of Desjardins Capital Markets. Please go ahead. Thanks. Good morning, guys. Hi, Kyle. So I'm just kind of following up a little bit on John's question there. So in your if you haven't had many early discussions yet with your tenants, I'm just wondering, do you know how many have had to shut down operations or if service and repairs are still ongoing at this point? To our knowledge, we've not been informed of any closures. Okay. So it wasn't that long ago that March 4, we were at 12:40 and there wasn't really an issue. So our tenants are also experiencing the same what's happening and they're rolling their sleeves up. But auto service is something that's certainly needed. It is an essential service, but we certainly believe that the volume during the COVID lockdown will be at a lower level. Okay. And then I guess to your knowledge, is there any language in your leases that would provide tenants the ability to either defer or ask to have rent deferred? Should they be forced to shut operations similar to the government kind of forcing them? Yes. I mean, no one there's nothing in it that stops anyone from asking anything. No one's shy about asking. But as far as the rights, a lot of our leases have no force majeure and the ones that do a force majeure, we actually have a carve out states, with the exception of rent payments. So it would be very difficult for them to be able to point at something. I think it is more of a, as you called it, an ask or request. And we do like the fact that there's indemnification behind it. Okay. That makes sense. And then just the last one for me, just some clarification on the $500,000 of G and A this year. So is that incremental to the 2019 total G and A that was spent? That's correct. Well, you've got to for the 2019, you'd have to deduct the $1,000,000 that was a one time and then you would have to add the $500,000,000 Okay, great. That's what I thought. Just wanted to be sure. Yes. And that's just internalization. So I wouldn't that's just internalization. There's obviously depending on where we go on infrastructure and hiring individuals. We'll see where that leads us. But at this point in time, those numbers are only associated to the internalization. Okay, great. That's it for me. I'll turn it back. Thanks, guys. Thank you. The next question comes from Sumayya Fayed at CIBC. Please go ahead. Thanks. Good morning. Good morning. Just in your commentary, Milton, on the pandemic, you mentioned an increased level of preparedness and ability to act quickly. Just any color on what that exactly entails for your business at this point in time? I would believe we're not alone in that most of the other REITs, especially the proactive REITs, whether it's creating an ad hoc committee or whether it's creating more frequent Board calls. Just yesterday in our board meetings, in the morning, Quebec announced and in the afternoon, Ontario announced. So that is just making sure that the ability to adapt and obviously putting in place a preparedness plan on COVID-nineteen. All of that kind of goes into that comment. It is not business as normal across our economy right now. So we not treat it as though its business is normal and therefore we're just at a higher rate of awareness and a higher rate of communication. Okay. So just being more prepared. And I guess it's still early days, but in the current environment, how do you kind of foresee new development activity on the delivery side to be impacted? Well, yes, I mean the short answer is it's early days. In this very moment of time, I think people are whether it's Dilawri or other dealer tenants are trying to figure out what's their next step defensively and on the acquisition opportunistic side. I'm sure they're looking at both sides. It's too early to tell. On the mid to long term, I think these are the groups that are going to be able to take advantage of the consolidation, which I think will increase once these clouds dissipate. Certainly, they have the bank they being Dilawri and the other dealership groups have the banking relationships to be able to move forward as this market gets back to normal. Okay. That's fair. And then just lastly for me, for the capital provided for the handful of properties in the quarter, roughly what kind of rent increase did you see as a result of that? They tend to be very much in line with the original cap rates going in, potentially 25 basis points, 35 basis points higher. But if it's done as the contract as part of the acquisition, it tends to be at the same price as the acquisition or the same cap rate as the acquisition, I should say. If it is done as a later ask, it really depends on the market and can be slightly higher. Okay. And these ones were engaged at the time of the acquisition of the lease? They were announced as part of the Yes. The ones that were done for the Dixie Automall and Meadowvale Honda, that was done post and that was certainly announced December as part of our race. Okay. I would say there's not a material difference than our normal cap rate range. Thank you. The next question comes from Mark Rothschild from Canaccord. Please go ahead. Thanks. Good morning. Most of my questions have already been asked and answered. Maybe just in regards to your tenants, it's reasonable to expect that some are going to ask for some rent deferral or rent relief of some sort and that that might be something that you're going to feel you need to do. But besides for that, you do have sufficient liquidity to complete acquisitions buying back stock? Clearly, the units are very depressed today and the market is evolving quickly, but how do you think about that now that you've grown the wheat quite a bit over the past few years? I mean, the first thing we look at is cost of capital. And today, certainly, the stock price or the unit price that we're trading at today, that is a very compelling return on capital. We also have to we originally did the raise in December to allow us growth. But in effect, it's allowed us a very secure level of liquidity, which we're certainly enjoying and benefiting from right now. We want to make sure that we maintain that liquidity as until the clouds part on this. It does allow us enough room to do some things, but I don't think you'll see dramatic moves because we like that liquidity and certainly do. Okay. Thank you. Thank you. The next question comes from Matt Logan of RBC Capital Markets. Please go ahead. Thank you and good morning. Good, Matt. Milton, following up on your comments about strong banking relationships for your tenants, can you provide any color on Del Barre's liquidity position, just cash and undrawn lines? No. They certainly have to provide us with financial statements, but they don't provide us with liquidity statements. And the last financial statements we received were December 31 as of end of year. They certainly enjoy a lot of regions and a lot of dealerships, But no, we can't provide comments on that. We're not provided the comments either. Okay. In the MD and A, there is commentary on Del Warri's debt to EBITDA. Do you know the debt to gross book value figure for Del Warri? No, Matt, we don't have that information. We're only provided those metrics that we identify in the MD and A. Okay. Maybe just changing gears And I guess the other point is that those are December 31, 2019. So they're not going to be reflective of anything that has happened, but that's the information that we're that's happened, but that's the information that we're providing. Yes, the world has changed a lot in March. Certainly. In terms of your own liquidity position, is there a minimum amount of cash and under owned facilities that you'd like to maintain? Given these times, we are managing cash in a very prudent manner. So we have the undrawn lines of 75. We'll decide over the next 6 weeks how much cash we'll keep on hand. But between cash and undrawn, we certainly want, I'd say, easily 6 months. But I would go with at this point approximately 6 months, but we're not near that. We're still well above that. The 6 months would be relative to which figure? 6 months to run the operations and our commitments for the operations. And in terms of mortgage maturities for 2021, can you tell us the value of that mortgage? Yes, I don't disclose it. And the reason why I don't disclose it because it's not material. So it's a small amount and that's why I don't disclose it. But I'll say it's immaterial to the overall operations of the REIT. Okay. That's The bulk of that 15.7% is the latter to the 2027. Got you. Okay. Appreciate the commentary. That's all for me. Thank you. The next question comes from Tal Woolley of National Bank Financial. Please go ahead. Hi, good morning. Good, Jeff. Just wondering, Milton, if you can speak to a situation where, say, a dealership does wind up in some level of financial distress during this period, what's the role the OEMs also play in helping work and helping to work out that situation? Because it's not like they want to see the dealership fail and it's not like they can just open up another one next door in like a couple of days. So can you talk maybe a bit to sort of how that relationship plays out in this kind of market too? Yes. I mean, you're touching on what I consider as being a bit of a shadow covenant. You can imagine how much OEM spends on R and D, manufacturing and marketing just to see a dark dealership. They would certainly be working with the existing dealer to provide them liquidity, AKA being sold to another dealership group that has the ability to kind of run those operations. That's the one side of it. The other side of it is we are talking about franchises. So it's not that it's a large chain that can decide to shut down 1 third of its locations. If you shut down a location, you lose that franchise that has the in most cases in a kilometer radius. And that is worth something. One of my comments earlier is we looked at whether it's our industry. Certainly, we looked at our industry. But overall, there's going to be groups that were on the precipice tenants that were on the precipice of staying in business and this pushes them over. There's going to be other tenants that there's not going to be a pent up demand. You either consume it now or you dealership communities in the 3rd category, which is that anything you delay today as far as a new purchase and or service, you're going to have to do when those clouds part. So it certainly is worthwhile for dealers and very worthwhile for OEMs to make sure that when this air clears that their dealership and their footprint remains. So yes, I think it's going to be very important for them. Okay. That's great. Thank you very much. Thank you. There are no further questions at this time. You may proceed. That's great. Thank you, everyone. Have a good day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.